July 2009

July 30, 2009

A company’s brand name is among its most visible and valuable assets. So one would expect that the greater a brand’s value -- as a percent of its owner’s market cap -- the less its stock would suffer in a crash. Consciously or subconsciously investors are, like the rest of us, more comfortable and familiar with the better brands so they should naturally dump these stocks last on the way down.

The crash of ’08 provides an opportunity to design “natural market experiments” to answer important questions. Among them: did better brands suffer less than lesser brands?

To answer this question I analyzed the stock market performance of the 62 firms traded on U.S. exchanges that are the parent companies of 65 of the most valuable brands as measured by Interbrand in their 2008 valuations. Every one of the parent companies lost value in the crash of ’08. The combined loss of market value for these firms was $4.1 trillion USD: representing 64% of their highest pre-crash market cap.

Consider these two examples. The Coca Cola Company (KO) brand value was 44.0% of its highest pre-crash market cap. The company lost 43% of that value by March 2009. The pre-crash value of International Business Machines’ (IBM) brand represented 33% of its highest market cap. Then IBM lost 49% of that value in the crash. In both these cases, the decline in the market value of the company was less than the average 64% decline for all 62 companies in the sample.

Alternatively, one might expect that the lower a brand’s value as a percent of market cap, the more its owner would suffer in a market collapse.

Here are two typical examples of less valuable brands. The pre-crash brand value created by JPMorgan Chase & Co. (JPM) was 6% of its highest market cap. Then JPM lost 71% of that value by March 2009. The pre-crash brand value created by Marriott International (MAR) was 17% of its highest market cap and the company lost over 79% of that value in the crash of ‘08.

As you will see, these results are not isolated examples – they are representative of the sample.

THE BEST GLOBAL BRANDSBusiness Week, in cooperation with Interbrand, publishes a list of the Best Global Brands every year. In his September 18, 2008 article Picking the 100 Best Brands, Bert Helm explained how Interbrand puts a number on the power of a name:

Interbrand takes many ingredients into account when ranking the value of the Best Global Brands. Even to qualify for the list, each brand must derive at least a third of its earnings outside its home country, be recognizable beyond its base of customers, and have publicly available marketing and financial data.

These requirements eliminate many household names like Chevrolet and AT&T, Inc. (T) as well as privately owned companies and their divisions. Not all the brands from large portfolios are included, though two of the Proctor & Gamble Co.’s (PG) most valuable brands – Gillette and Duracell – are. In these cases the brand values were added and attributed to their owner.

Interbrand valuations are based on the net present value of forecast earnings using data from the twelve months ending June 30, 2008. This is important, because it means the impact of the market meltdown was not reflected in the 2008 valuations of the 65 brands in this study. Thus, the foundation for natural market experiments was built.

Jonathan Knowles, who knows a thing or two about brand value, also took advantage of this opportunity. Using the classical finance approach he compared the S&P portfolio losses with the losses of valuable brand portfolios. See Is There a Brand Bonus?

A NATURAL MARKET EXPERIMENTA “natural experiment” is one where unexpected, sometimes dramatic, circumstances create a real environment where one can approximate the controls of a laboratory. The massive market meltdown of 2008 created just such conditions.

The following chart outlines the conditions for this natural market experiment in brand value [BV] and cap loss [CL]. Note it’s impossible to have a true control group – firms that didn’t receive the “experimental treatment” -- because all firms suffered from the market crash.

The 62 firms are organized in this chart based on their relative performance in creating higher/lower than average brand value (X axis) and enduring lower/higher than average declines to their market cap (Y axis). The 15 green firms were out-performers, the 21 blue firms were underachievers, and the 26 red firms were inconsistent performers. To create the experimental conditions the 62 firms in the sample were sorted into each of the four cells in the above chart based on the following criteria

The 15 firms in the green cell (+,-) created greater than average pre-crash brand values and experienced less than average post-crash losses in their market caps;

The 21 firms in the blue cell (-,+) created less than average pre-crash brand values and experienced greater than average post-crash cap losses.

The 25 firms in the two red cells experienced simultaneously greater brand value and cap loss (+,+) or lower brand value and less loss (-,-).

These counts set up the conditions for this natural experiment. The green, blue and red cells serve as quasi-controls under the null hypothesis that there are no statistically significant differences between them. In fact, based only on these counts, there are no significant differences.

Keep in mind the counts in the chart above were used to design the experiment, not to test it. In this sense, the counts don’t count. What really count are the average dollar pre-crash brand values and the post-crash losses in market capitalization of the firms in each cell.

BRAND PERFORMANCE IN HARD TIMESThe greens outperformed the blues by 3 to 1. They created an average of $21 billion in pre-crash brand value (33% of the total sample pre-crash brand value). Then they experienced a $29 billion average decline in market capitalization during the crash (11% of the total sample cap losses). The Green firms did as well as they could during the crash of ’08.

The blue firms went down the drain. Before the crash these 21 firms created an average of $12 billion in brand value (25% of the total sample brand value). Then, during the crash they experienced an average decline of $96 billion in their market capitalization (50% of the total sample cap losses). In other words, the value of the blue brands was around ½ that of the green brands, but the owners lost over 3 times as much. In the crash of ’08 the blue firms did even worse than the red ones.

Overall, this analysis produced a highly significant F-stat (5.2) on the loss of market capitalization. The probability that these losses in market cap were due to chance is less than 0.01. And more important the F-stat (1.9) in pre-crash brand values was not significant. The probability the observed differences in pre-crash brand values were due to chance was 0.16. Excluding the seven financial institutions counted in the blue group had no material effect on these results.

BRAND ROBUSTNESSSixty-five leading global brands were sailing directly into a perfect financial storm. Some were a lot more valuable than others. The brand values of all firms were determined by the same process -- before the storm appeared on the radar screen. The companies that owned those brands were traded on U.S. stock markets, so there were no exchange rate differences to confound the analysis:

The more valuable brands accounted for 33% of the total pre-crash value. The companies that owned those brands incurred losses in their market cap amounting to only 11% of the losses suffered by all firms in the study.

The less valuable brands accounted for 25% of the total pre-crash value. Their owners incurred losses amounting to 50% of the total sustained during the storm.

The brands with inconsistent performance accounted for 42% of the pre-crash value and 40% of the losses in market cap incurred by all firms in the sample.

One can conclude with high confidence that, as a rule, companies with better brands suffer less than those with lesser brands.